Know in Advance About the Fed’s Shift in Policy Simply by Watching This Key Data Point

By Sasha Cekerevac | Small Business

Know in Advance About the Fed’s Shift in Policy Simply by Watching This Key Data Poin …The other day I was out with a friend of mine and the topic of conversation ended up being the Federal Reserve and the potential for economic growth going forward.

My friend’s concerns, I believe, are quite common among many readers; he’s confused at the mixed messages the Federal Reserve has been sending regarding changes to its monetary policies.

On one hand, he reads a report stating that the Federal Reserve will certainly reduce monetary stimulus; on the other hand, he hears about a data point showing slowing economic growth, which might keep the Federal Reserve on its current course.

For most investors, even for professionals, it can certainly be confusing.

Of all the things to really watch regarding the Federal Reserve, when it comes to economic growth, I would pay attention to higher wages.

The Federal Reserve’s moves to try and stimulate economic growth can only be an indirect driver for higher wages. Obviously, since the central bank doesn’t pay our salaries, it can’t directly influence income. But it is attempting to create some level of economic growth at which businesses feel comfortable in spending and expanding.

The latest Beige Book by the Federal Reserve offers additional insight into the underlying condition of economic growth in America. (Source: Beige Book, Board of Governors of the Federal Reserve System web site, September 4, 2013.)

With respect to wages, the Federal Reserve’s Beige Book notes that overall income remains modest, aside from those for job positions that are for highly skilled employees. I’ve mentioned this many times before: the lack of economic growth partially stems from a structural condition in which unskilled workers are unable to obtain positions because they are not trained for the new economy.

Unfortunately, there is nothing that the Federal Reserve can do to take a high school dropout with no skills and turn them into a high-tech computer programmer or an engineer. This step of re-training needs to occur through Washington, which we know is quite inept at making any sort of decision that benefits economic growth.

The Federal Reserve’s Beige Book did note that higher healthcare costs were beginning to affect compensation expenses, which certainly can have an impact on economic growth. If businesses are looking to expand and are facing significantly higher healthcare costs over the next couple of years, how likely are they to hire new people at an aggressive rate? I would think that at the very least, they would have second thoughts about hiring and bringing new people onto their payroll.

Without the increase in wages, economic growth will most likely remain quite subdued. This is beyond the realm of the Federal Reserve, since it can only create an incentive structure through monetary policy. However, if businesses can’t find skilled workers, this means that even if they would like to expand, they can’t. This is a sort of domino effect; if one industry can’t expand due to a lack of skilled workers, this means less economic growth overall.

An example of positive effects of the interlink between industries is the boom in housing, which is causing economic growth in many other sectors, including new trucks used in construction, companies that sell building materials, clothing companies that supply work boots, and so on. Economic growth will forever be linked between jobs and workers, and they need to match up properly.